Transcript INTERNATIONAL EXPERIENCE OF LONG TERM LIFE …

INTERNATIONAL EXPERIENCE OF
LONG TERM LIFE INSURANCE:
A MODEL PROPOSAL FOR
EMERGING MARKETS
Dr. Ahmet Naim OKTAY
Yeditepe University
INTRODUCTION
Introduction
• The Caucasia is a geopolitical region at the border of
Europe and Asia and situated between the Black and
Caspian Sea. Politically, the Caucasus region is
separated between northern and southern parts.
Introduction
Introduction
North Caucasia comprises of the following states:
• Russian Federation (partially) → nominal GDP/Capita $12.993
▫ Chechnya
Pop: 1.268.989
▫ Dagestan
Pop: 2.910.249
▫ Ingushetia
Pop: 412.529
▫ Adyghe
Pop: 439.996
▫ Kabardino-Balkaria
Pop: 859.939
▫ Karachay-Cherkessia
Pop: 477.899
▫ North Ossetia
Pop: 712.980
▫ Krasnador Krai
Pop: 5.226.647
▫ Stavropol Krai
Pop: 2.786.281
• Total Population
15.095.469
Introduction
South Caucasia consists of the countries below:
• Azerbaijan
(Pop: 9.165.000, nominal GDP/capita: $6.872
• Georgia
(Pop:4.469.000, nominal GDP/capita: $3.210
• Armenia
(Pop:3.262.200, nominal GDP capita : $3.032
Total Population : 16.896.200
As a result when we talk about Caucasia Region we talk about a
population of 32.000.000. Of course this 32.000.000 belongs to
different cultures and has different languages. But life insurance
has a universal language which we will have a look in this study.
Introduction
The World Bank classifies countries according to their GDP per capita.
Low income Countries
Middle Income Countries
Lower-Middle Income
Higher-Middle Income
High Income Countries
2010
1005 – below
1006 – 12.275
1006 – 3.975
3.976 – 12.275
12.276 - above
TABLE I: Classifications of World countries according to GDP/Capita
Source: Halil Seyidoğlu, International Economics p.12 & World Bank Report, p.75
Introduction
TABLE II: Development in GDP/Capita and Life Insurance
Years
Number of Insured’s
1985
407.719
Mathematical
Reserves (USD)
11.177.700
GDP/Capita
1990
3.724.241
163.955.137
2.682
1995
4.904.264
460.177.140
2.759
2000
7.091.561
1.429.167.938
2.965
2005*
7.288.678
3.943.317.837
5.008
2010*
17.497.277
10.313.214.236
9.890
*2005 and 2010 includes individual pension funds and their participant.
Source: Ahmet Naim Oktay, Principale of Investment in Life Insurance, p.2-3,
Pension Monitoring Centers Statictics ad Insurance Supervisory Board Reports.
www.tuik.gov.tr
1.330
HISTORICAL DEVELOPMENT OF
LIFE INSURANCE
Historical Development Of Life Insurance
The main motivation for life insurance is to provide
financial assistance for people after the decease of the
family’s breadwinner.
• In ancient Greek
• Rome
• A rider to marine insurance policies
Historical Development Of Life Insurance
The first example of a life policy was issued in Great Britain in 1583.
▫
▫
▫
▫
▫
▫
“Amicable Society for a Perpetual Assurance Office” 1757.
Some mathematicians were working on mortality tables.
Edmund Halley
James Dudson (1755).
Equitable Life Society established in 1762
Richard Dune and William Morgan to invent “whole life” policies.
• “insurable interest” in life contracts in 1774.
• First products with profit sharing launched by Westminster
Society (1792) and Pelican Life Office (1797).
Historical Development Of Life Insurance
• After the industrial revolution, for both death and
retirement benefit became a new trend.
• In parallel with increasing inflation and volatilities in 1970’s,
Universal Life policies
• Several life insurance companies had to be liquidated
• Balwin United (1983). Executive Life (1991), First Capital Life
(1991), Fidelity Bankers Life, Monarch Capital Corporation,
Mutuel Benefit (1991).
Historical Development Of Life Insurance
• In order to protect insured’s from this kind of financial
disasters, states brought new regulations
▫ The solvability
▫ The transparency
▫ The audit and rating.
THE IMPORTANCE OF LIFE
INSURANCE IN TERMS OF
ECONOMICS
Impact of Life Insurance on MacroEconomics
Some researches showing that insurance market has significant
roles in promoting economic growth. The process of economic
growth requires investment and increases in real savings.
Impact of Life Insurance on MacroEconomics
• There are a lot of instruments of which people can save
▫ accounts in the banks, securities, bonds, etc.
• But life assurance provides protection from economic loss of an
unexpected death, people can also save through their life
• We can say that, premium payment may be considered as a semicompulsory saving.
Impact of Life Insurance on MacroEconomics
• The logic of those premium reserves
▫ early premium payments
result in overpayments in the early policy
Death risk (0,00)
Risk
11
10
9
8
Premium
7
6
5
4
3
2
1
T=time
0
10
20
30
40
50
60
70
Source: Ahmet Naim Oktay, Pension Funds and their taxation, p.99
• In this way, life insurance has indirectly increased savings of the economy.
Impact of Life Insurance on MacroEconomics
• TABLE III: Life premium volume in USD in 2010
Region
North America
Latin America and Carrabin
Europe
Asia
Africa
Oceania
TOTAL
•
Premium Volume
(in millions of USD)
557.007
54.458
955.553
858.466
42.796
39.436
2.507.715
Source: Sigma, World Insurance in 2010, Statistical Appendix, p.10
• The life insurance premium composes 57,9% of the total
premium volume which is USD 4.324.239 million.
Impact of Life Insurance on MacroEconomics
An empirical and theoretical study done in Nebraska shows us
• that one percentage point increase in the growth of life insurance
industry is associated with a 0,25 per cent increase in the growth
rate
• the life insurance growth explains approximately 14% of the
variance of economic growth
Impact of Life Insurance on MacroEconomics
• Insurance and pension sector normally induces a superior GDP growth then other sectors.
• Source: TSSRB, Shaping our future: 2023 vision for Turkish Insurance Sector, 2012, p.6
Impact of Life Insurance on MacroEconomics
Europe
• produces 38% of life premiums, in the world
• life insurance reserves and in pension funds reserves was
1.442.643 million of euro in 2011
Impact of Life Insurance on Household’s
Economics
• The family as a smallest unit of the society and economy
Impact of Life Insurance on Household’s
Economics
Keep in mind some differences from general insurance:
▫ risk namely “death” is certain.
▫ life insurance is a long-term contract
▫ It is difficult to determine the economic or the financial value
of life.
▫ life insurance contract is not a contract of indemnity.
▫ the premium is calculated according to mortality table.
Impact of Life Insurance on Household’s
Economics
•
•
•
•
Different economic uses life insurance offers:
Life insurance makes the family financially secure.
Life insurance is also a saving instrument.
Helps in meeting responsibilities of even after death like higher
education of children,
• Helps in repaying the mortgage loans
• Life insurance also provides old age benefits,
• Creditors can also use it in case of non-repayment
Impact of Life Insurance on Household’s
Economics
People are likely to change their saving behaviour if they have life
insurance
• they feel less necessary to accumulate funds
• policy loans are utilized as an emergency fund
• insurance helps reducing worry and fear
▫ peace of mind,
• increases the happiness of individuals.
Impact of Life Insurance on the MicroEconomics
• Partners of firm can get the lives of the partners insured
• A firm can get the life of its key man insured
• Group insurance policies can improved productivity.
• Industry offers regular full time employment to a large number of
people
TYPES OF LONG TERM LIFE
INSURANCE
Types of Long Term Life Insurance
• Term life insurance
• Whole life insurance
• Endowment insurance
• Pensions
Term Assurance Plans
• protection for a limited number of years.
• no maturity value.
• The face amount of the policy is payable only if the insured’s
death occurs.
• Nothing paid in case of survival
• Can be issued for a short period but customarily provides
protection for at least a set number of years,
• Since price of terms products of different companies can be
easily comparable, a wide variety product diversification was
made
Term Assurance Plans
• Level term assurance: The amount insured is at a fix
level within the term of the policy.
• Renewable Term Assurance: The insured can renew his
policy at maturity date without any medical
examination.
• Convertible Term Assurance: The insured can convert
his policy into a whole life or endowment policy at any
time he wants.
• Decreasing Term Assurance: These policies are
commonly used to pay off a loan balance on the death
of the debtor, insured e.g. mortgage protection plan.
Term Assurance Plans
• Expanding Term Assurance: Fixed Death Benefit may cause a
decrease in real terms during the period of the policy. This policy
gives the opportunity to increase death benefit at a fixed rate each
year.
• Index-linked Term Assurance: This type of policies gives a rise to the
amount insured according to the consumer price index.
• Unit linked Term Assurance: The premium paid by the insured are
allocated to purchase “units”. If the value of the limits is higher than
the amount defined at the inception of the policy, this surplus is
paid to the insured.
• Money back Policies: In case of a death, the amount insured is paid to
the beneficiary of the policy. If the insured survives at maturity date,
the premium is refunded.
Whole Life (Straight Life) Policies
• Whole life insurance provide protection over one’s
entire life time.
• Payment of the face amount upon the insured’s death
regardless of when death occurs.
• Terminal age in all mortality tables is 100 years.
• Cash values are available by surrendering the policy.
• Loan can be obtained.
Whole Life (Straight Life) Policies
• For a $ 100.000, straight life policy issued at age 35, for example, the
cash value may be $5.000 after five years and $12.000 after ten years,
$28.000 after twenty years and $100.000 after sixty-five years.
FİGURE: Joseph M Belth, Life Insurance a consumer’s handbook
Whole Life (Straight Life) Policies
• Policies paying a set benefit ordinary whole life policies
are certainly sold, however investment linked benefits
are more common. Policies with profits (also termed
“participating”),
• Another variation is unit-linked cover. Once the number
of units possessed known, the policyholder can quickly
value the policy as the unit price is publicly quoted.
Whole Life (Straight Life) Policies
• Universal Life Policies launched in USD in 1970’s and
still a good product for emerging market.
• It has two main characteristics: Transparency and
Flexibility.
Whole Life (Straight Life) Policies
• Transparency is achieved by breaking down the contract
into its three components:
▫ The protection component
▫ The saving’s component and
▫ The expense component
• The second main characteristic is the “flexibility” of
charging the face amount, premium payments and cash
value
Whole Life (Straight Life) Policies
• In general the amount of risk stays constant irrespective of the level of
the cash value, so that the death benefit increases with the cash value.
Sum at Risk
Death benefit
Cash value
Duration of policy
•
FIGURE : Universal Life, Cologne Re, p.6
Endowment Insurance
• Endowment policies promise
▫ the policy face amount on the death of the insured during
▫ to pay the full-face amount at the end of the term of the insured services the term
FIGURE: Diagram of Hypothetical Twenty-Year Endowment
• Source: Joseph M.Belth, p.43
Endowment Insurance
Endowment policies may be diversified as follows:
• Single premium endowment policies.
• Retirement income policy: the amount payable at death is
the face amount or cash value, whichever is greater.
• A semi endowment policy-pay upon survival.
• Modified endowment policy-provides for payment
periodically.
• Deposit term- First year premium were not to be higher
than renewed premiums.
• Juvenile endowment policies – designed to cover child’s
education, marriage, and independence
Endowment Insurance
Those policies can be with profit or without profit. Cash
value of the policy that is to say the mathematical
reserves of the company is allocated for investment on
financial instruments and real estates.
The periodical (usually yearly) return of those
investments is shared between the company and the
insured at a defined percentage.
Endowment Insurance
• In unit linked policies, an investment fund is established
and divided into “units”. Each unit has a daily value. The
number of unit obtained by the policy owner and the
value of each unit gives us total cash value.
• The policyholder has the option of investing across
various schemes, i.e. diversified equity funds, balanced
funds, debt funds etc.
Endowment Insurance
Pension (Retirement) Policies
There are two main types of Pension products.
▫ Defined – benefit
▫ Defined contribution
• In defined benefit,
▫ the capital or the annuity to be paid at the maturity date is
known.
▫ The actuarial formula being used is the same as “defined
capital” or “deferred annuity” formulas.
▫ The increasing longevity of life and fluctuation of interest in
the market may cause problem
• Defined contribution product is an investment plan
• The investment principle is almost the same with unit-linked
policies.
GOVERNMENTAL SUPPORT
Governmental Support
• The governments support life insurance due to the
reason stated in chapter 3.
• Additionally, life insurance serves as a complementary
benefit to social security.
Governmental Support
• Turkish social security has an annual institution deficit > TL 25b...
• Total revenue and expenditure of Social Security Institution
• Billion TL
2000 01
02
03
04
05
06
07
08
09 2010
• Source: TSSRB; Shaping our future: 2023 vision for Turkish Insurance Sector, 2012, p.9
Governmental Support
• Therefore, long term life assurance and private pension has been
considered as a third pillared of social security.
PRIVATE PENSİON
&
LIFE ASSURANCE
OCCUPATIONAL PENSİONS
SOCIAL SECURİTY
DEATH
RETIREMENT
DISABILITY
• FIGURE: Life and pension as a supplementary Benefit
• There are three types of governmental supports for long term life insurance
Regulations as to Transparency of Life
Insurance
• Each year the global economy adds an estimated 150
million new customer of financial services.
• Even in well-developed markets, weak consumer
protection and a lack of financial literacy can render
households vulnerable to unfair and abusive practices
by financial institutions as well as financial frauds and
scams operated by intermediaries.
• At its heart, the need for consumer’s protection arises
from an imbalance of power, information and resources
between consumers and financial service providers
Regulations as to Transparency of Life
Insurance
• A financial sector should provide consumers with:
• Transparency by providing full, plain, adequate and
comparable information
• Choice by ensuring fair, non-coercive and reasonable
practices
• inexpensive and speedy mechanism to address
complaints and resolve disputes.
Financial Transparency
• Insurance companies have a great importance
▫ by alleviating the financial hardship if a covered risk takes
▫ by giving a considerable amount of saving, providing
financial security
Financial Transparency
• That is why the supervisory authorities impose rules to
facilitate customer’s periodic control on their on-going
contracts as
For this reason;
▫ The customer should receive periodic statements
▫ Customers should have a means to dispute the accuracy
of the statement within a stipulated period.
▫ Insurers should be required to disclose the cash value
within a reasonable time.
▫ a table showing projected cash values should be provided
at the time of delivery of the initial contract
Financial Transparency
• As a general rule;
▫ Every insurance undertaking is required to establish an
available solvency margin
▫ The solvency margin shall correspond to the assets free of
any foreseeable liabilities less any intangible item.
▫ Detailed rules of assets that can be included in the
available solvency margin.
• Solvency I rather crude “one size fits all” sets of rules.
• It only considers underwriting risk. The rules are not
designed to take into account credit, market or liquidity
risk.
Financial Transparency
• European Commission announced that they were going
to “take a global lead in insurance regulation” …. by
2013.
• The Solvency II exercise envisages a principals Basel II
approach. The insurers assess their capital needs,
degree of volatility, availability of reinsurance other risk
factors such as credit, market and liquidity risks.
Contractual Transparency
Consumer products can be broken into three categories:
• search goods (can be assessed in advance of purchasee.g. a piece of art),
• experience goods (can be assessed relatively quickly
with use- e.g. soap powder),
• credence good (attributes only discovered after a long
delay or upon occurrence of contingent event or nevere.g. a mutual fund). Insurance clearly fits into the
credence good category and the sector thus relies
heavily on the public’s trust
Contractual Transparency
• the aim of policy holder protection should surely be to:
a)
b)
c)
d)
Protect policyholders against losses arising from fraud
Ensure that policyholders are not misled
Prevent insurers from unfairly avoiding claims.
Provide compensation for policyholders
Contractual Transparency
• An insurance contract -likewise other legal contract- is
supposed to be concluded with good faith.
• Good faith “bona fide” might require the parties to;
a) keep every promise which is made,
b) negotiate in such a way as to avoid taking advantage of
another
c) do one’s best to complete the negotiations,
d) act fairly an honestly,
e) co-operate,
f) inform the other party of all the needs to know,
g) avoid lies and misleading conduct,
h) abstain from fraud
Contractual Transparency
• recent development in consumer rights and protection
obliges insurers to bear their responsibility arising out
of the duty of “disclosure” as a matter of good faith.
• The information would cover:
▫ the status of insurer
▫ the value and type of assets in the fund;
▫ the rates of return generated on the assets;
▫ the fees or commissions charged
Contractual Transparency
• As to the transparency in life assurance, according to the
Art.36 and annex 111 of Directive 2002/83/EC, a written
information to policyholders must be submitted relating to
the definition of benefits, term of the contract, means of
payment of premiums, surrender value and paid-up value (if
any) and a cancellation period. Art 35 states that the
policyholder has to have the opportunity to cancel the
contract within a period of between 14 and 30 days from
the time the policy holder was informed that the contract
was incepted (cooling of period). Since the life insurance
contract is a long-term contract, individual may be
persuaded by high pressure salesmanship to enter into
contracts which may not be entirely appropriate for them.
Contractual Transparency
• What remedies are available to the victim of bad faith?
▫ Avoidance (rescission)
▫ Termination of the insurance contract
▫ Compensation
Tax Incentives
• In many countries long-term life and pension premiums
contribution payment are encouraged through tax
exemptions.
• One way of this tax relief is called tax deduction.
• The other way is tax credit method. It is a direct, dollar-fordollar reduction in tax liability, as distinguished from a tax
deduction, which reduces taxes only by the percentage of a
taxpayer’s Tax Bracket (A taxpayer in the 31% tax bracket
would get a 31 cent benefit from each $1,00 deduction, for
example). In the case of a tax credit, a taxpayer owing
$10.000 would owe $ 9.000 of the took advantage of a
$1,000 tax credit.
Tax Incentives
• Also accumulated funds and mathematical reserves
return are encouraged by means of tax exemptions to
some extent.
• Also, the capital and annuities payment can be
exempted from taxes.
• We must confess that, in emerging markets where tax
payment behaviour is not very strong,
Governmental Sponsorship
• One of the method which is very efficient is the
participation of a government or a company into the
premiums payment of the policies.
• In this method, let’s say a percentage of 25% is added by
sponsor to the premium paid by insured. If the insured wait
till his contract’s maturity date, he can obtain this additional
fund consisting of the sponsor’s payments and its return. In
case of surrender his policy within 10 years only 50% of the
sponsored fund is paid to him. Additional fund may not be
paid to the insured if the policy is surrendered within the
first five years.
HOW TO SELL LONG-TERM
LIFE INSURANCE
How to Sell Long-Term Life Insurance
• At the first stage, some distribution channels like wise
internet, call center, banks even agencies have difficulty
even in understanding various aspects of the long term
life insurance policies.
• For this reason, a direct seller of an insurance produced
must act as a financial advisor as well.
▫ a special training,
▫ some conditions of academic background
▫ presentability is necessary.
How to Sell Long-Term Life Insurance
• As to the advertising, a sufficient budget should be allocated.
Sales & Marketing
Department
ZONE I
ZONE II
ZONE III
• A list of potential customer is a useful instrument to reach the client.
• The customer should be provided for a file and demonstration
explaining the product. Also, an explanatory note presenting the
produces must be read and signed by the customer.
CONCLUSION :
A MODEL PROPOSAL FOR
EMERGING MARKET
States Sponsorship
• in Turkey 65% of the insured cannot benefit from tax
deduction.
• Thus a governmental sponsorship is very important to
motivate people in purchasing long term life insurance
policies.
Regulation for Transparency
• The customer must be aware of
▫ all loadings on the policy
▫ an easily readable, understandable and comprehensive
text should be prepared.
• The public authority must announce the principles,
▫ check the actuarial aspect of the product
▫ control advertisement against unfair competition.
Distribution Channels
• Long term life and pension product are allowed to be
sold only through approved salesmen.
Simple&Comprehensive Products Must Be
Launched İnto The Market
• To keep the simplicity, a kind of universal life policy with profit can be
proposed.
• Ex : Yearly Premium
Company’s Loading 10%
Risk Premium for death (Cx/Dx)
Acquisition Cost
Saving Component
Technical Interest 3%
Cash Value to be invested
100 Unit
10 Unit
7,5 Unit
2,5 Unit
80 Unit
2,4 Unit
82,4 Unit
• Acquisition cost can be paid within the first two or three years of the
contract instead of spreading it over the year for faster selling.
Assistance Benefit
• Since long-term life assurance is a long term
commitment, it is strongly advised to give a cheap
fringe benefit to the policyholder to fortify his
confidence. This assistance may be a medical call center
service or “concierge” only.
Dispute Settlement
• Direct information and notification with the
policyholder will be highly recommended through
normal post and call canter to decreases cancellation
and lapses of contracts.
THANKS
Dr. Ahmet Naim OKTAY